ING Economics Department • January 2020

Rethinking the road to the

circular economy

ING Economics Department 2 Rethinking the road to the circular economy – January 2020

Introduction

Reality bites – let’s understand why, as fast as we can

There is a growing feeling of urgency about moving towards a more sustainable

economy, as illustrated by the Sustainable Development Goals and Paris

Agreement. The circular economy is proposed as a solution for today’s

environmental challenges, such as climate change.

In 2015 we published ‘Rethinking finance in a circular economy’. It gained a lot

of traction in unchartered territory. We focused our analysis on opportunities. It

helped us, and many partners, to understand the concept much better. Now,

five years on, it’s time to take the next step. But we face a situation where

reality bites: if anything, the world is becoming less, not more circular.

This reports helps us to understand what is happening. It takes a new look at the

circular economy. Firstly, it proposes seeing the circular economy as a means to

an end, a way of causing less environmental harm. Secondly, we must face the

strength of opposing forces. Thirdly, business needs policy makers to step in. And

finally, the financial sector will have to step up its ingenuity to help scale up the

circular economy.

We hope this report helps to address the next steps on our road to a circular

economy. It is not an easy road, but understanding the hurdles may help us to

step up the pace. Doing so will prove vital, so let’s get started as fast as we can.

Marieke Blom Chief Economist ING The Netherlands

Table of contents

Executive summary 3

1. Why do we need to move to a circular economy? 4

1.1 Why do we need a circular economy? 5

1.2 Why is a circular economy not always the solution? 6

1.3 What is the current status of the circular economy? 7

2. What are the hurdles for circular economy growth? 9

2.1 What are the hurdles in the economy? 10

2.2 What are the hurdles in the financing market? 11

3. How can we get the circular economy going? 13

3.1 What policy actions can set into motion CE growth in the economy? 14

3.2 What actions can stimulate financing of the CE? 16

3.3 Case studies: how to deal with the hurdles in practice 18

Sources 20

Appendix I: what is the circular economy about? 22

Appendix II: what are the main circular business models? 23

Colophon 24

ING Economics Department 3 Rethinking the road to the circular economy – January 2020

Executive summary

Without policy the circular economy will shrink further

We are headed the wrong way

Today’s world is far from circular. Research by Circle

Economy estimates the world was 9% circular in 2015.

As economies grow, that share falls: ING research shows

consumers are less inclined to reuse when income rises.

Also, higher demand for convenience goods drives up

per capita resource demand. The world is becoming less

circular as a result.

Circularity as a means to less environmental harm

The circular economy (CE) is seen as a means to several

ends. We argue it should be seen, first and foremost, as

a way of reducing the negative environmental impacts

of resource extraction, processing and waste.

Secondary benefits of the circular economy are lower

supply risks related to geo-political tensions and

resource scarcity. These risks are relevant only for a

relatively small share of all resources.

Striving for a fully circular economy not optimal

Since we see circularity as a way of reducing

environmental harm, we should compare it with other

strategies. Sometimes other strategies can be more

effective. For example, electric vehicles and renewable

energy may be more effective in reducing greenhouse

gas emissions than a longer life span for cars. It is

therefore neither realistic, nor optimal to strive for an

economy that is 100% circular. CE seems best suited to

quickly reducing impacts via high volume & frequency

goods that consist of few, homogenous resources,

such as (food) packaging and textiles.

Market failures main obstacle for circular growth

On the supply side of the economy, market failures are

the main reason the CE is not taking off. Firstly, there

are three major market failures in the economy:

1. Negative environmental effects of market activities

(external costs), such as climate change and air

pollution, are not reflected in prices;

2. Transaction and operational costs are higher in a

CE, partly explained by the higher labour intensity of

reuse and recycling strategies;

3. Too low volumes (demand and/or supply) for

secondary goods and materials prevent circular

markets from coming about.

These market hurdles hamper growth of the CE, by

negatively affecting the business case of circular

solutions. And even in instances where a positive

business case exists, there are three hurdles in the

financing market:

4. Innovation risks are higher: the innovative nature of

the circular economy makes investing in CE riskier

than conventional businesses;

5. Financial institutions overlook ‘linear risks’: some

risks that are higher in the ‘linear’ than circular

economy are overlooked, such as stranded assets

risks and risks of more stringent environmental

laws. Overlooking these risks works against the CE;

6. The Product as a Service business (PaaS) model, one

of the main circular business models, is perceived to

be riskier than conventional businesses.

Policy needed for scale

Current progress on the CE is too slow given the

environmental harm done. Policies that level the

playing field between the current and circular

economies are needed to scale up the circular economy.

This study identifies suitable policy actions:

• Price in negative externalities via taxing, norms, bans

and subsidies;

• Spur innovations, e.g. platform technology, that lower

transaction and operational costs in the CE;

• Disseminate knowledge and implement ‘nudges’ to

increase market interest in engaging in the CE;

• Increase the amount of risk capital for CE start-ups;

• Stimulate further integration of ‘linear’ risks in

financial risk models.

Business and financial sector must tackle hurdles

At the same time, companies can take up the challenge

of bringing the CE forward. Despite the hurdles, we

already see businesses are able to come up with

innovative circular business opportunities. Financial

institutions have to improve their risk approach as well as

come up with new financing solutions, such as project-

based financing.

ING Economics Department 4

Chapter 1 | Why do we need to move to a circular economy?

1.1 Why do we need a circular economy? 5

1.2 Why is a circular economy not always the solution? 6

1.3 What is the current status of the circular economy? 7

ING Economics Department 5 Rethinking the road to the circular economy – January 2020

1.1 Why do we need a circular economy?

Reduction of environmental impacts main reason for CE

Circular economy is a means to several ends

The current economy, which could be thought of as

linear, presents us with a few important challenges. The

circular economy (CE)1 can help to tackle some of these.

1. CE market outcome for physically scarce materials

Firstly and contrary to common belief, many resources

can not be denoted as scarce (PBL, 2017). Only a limited

amount of all minerals, e.g. antimony, molybdenum

and zinc, are scarce (Henckens et al., 2016). Here,

markets will automatically support CE innovations that

increase resource efficiency and/or substitute scarce

materials, by increasing market prices

for scarcer goods. A more circular economy will

therefore be the natural market outcome for physically

scarce resources. Given that this holds for a minority of

resources, physical scarcity can be seen as the least

pressing problem that the CE needs to tackle.

2. CE can reduce a country’s supply risks

Dependency on imported resources creates the risk of

man-made scarcity in a world with geopolitical

tensions. The threat of disrupted supply chains can add

to, and result from, political tensions. Given that geo-

political developments are often unpredictable, this can

lead to sudden price increases.

The US and most of Europe are traditionally net

importers of primary resources (IRP, 2017). For Europe,

China is the supplier of almost two thirds (62%) of all

critical minerals. Shifting towards a CE lowers import

dependency to the extent that it creates new

substitutes for, or opportunities to recycle imported

resources. CE in these cases can avoid sudden shocks.

3. Reducing environmental harm main reason for CE

So, scarce resources are only a small part of the

economy. However, reducing resource use is vital for

reducing negative environmental impacts. A major

share of current negative impacts is related to resource

extraction and processing (IRP, 2019). The most pressing Europe depends on other countries for most critical raw materials (CRMs) Countries accounting for largest share of EU supply of CRMs

Norway Silicon metal

France Hafnium

USA Erbium Helium Samarium

Mexico Fluorspar

Brazil Niobium

Finland Cobalt

Russia Scandium Tungsten Vanadium

China Antimony Baryte Bismuth Cerium Dysprosium Gadolinium Gallium Germanium Holium Indium

Lanthanum Lutetium Magnesium Natural graphyte Neodymium Praseodymium Terbium Thulium Ytterbium Yttrium

environmental issues, loss in biodiversity, water scarcity,

greenhouse gas emissions and air pollution are all

strongly driven by resource use (see figure below).

Source: European Commission 2017

Nigeria Tantalum

Morocco Phosphate rock

Turkey Borate

Kazakhstan Phosphorus

Indonesia Natural rubber

Use of resources puts pressure on the environment

Resource extraction and processing account for…

90% More than 90% of global biodiversity loss and

water stress impacts

50% 50% of the total greenhouse gas emissions

Around one third of the health impacts 33%

related to air pollution

ING Economics Department 6 Rethinking the road to the circular economy – January 2020

1 Refer to Appendix I for a definition of the CE. Source: UN International Resource Panel 2019

ING Economics Department 7 Rethinking the road to the circular economy – January 2020

1.2 Why is a more circular economy not always the solution?

Costs of higher circularity sometimes exceed the benefits

Circular economy is a means, not an objective

The CE is a means of reducing environmental harm. But

circular strategies are not always the best solution (the

most effective). There are indications of where

circularity is, and is not, the most suitable strategy.

1. Other strategies are more effective

In some areas there are real opportunities for

alternative strategies. For example in the agricultural

sector, where the shift from animal to plant-based

proteins is vital in reducing climate change impacts

(Waite et al., 2018). Shifting from meat to plant-based

proteins is initially more effective than applying circular

practices in livestock production (De Boer & Van

Ittersum, 2018).

In the energy sector, energy transition is key in

reducing greenhouse gas (GHG) emissions (Ellen

Macarthur Foundation, 2019). Electrification and

renewable energy are relatively quick wins. Moreover,

strategies that fit in the energy transition sometimes

conflict with the principles of the CE (see figure). Given

the fact that a major share of global climate impacts,

biodiversity loss and water distress are caused in the

Costs of higher circularity exceed the benefits

Sometimes the business case for circular strategies is

missing (financial costs exceed the benefits) and

environmental gains are limited. For example the

recycling of municipal plastic waste, where the optimal

level of recycling usually lies below the maximum level.

Beyond the optimum point, the extra financial costs

(for collection, separation and recycling) exceed the

extra financial benefits (the market value of the

recyclables) and the environmental gains are small

(Centraal Planbureau, 2017; PBL, 2017). In this case, the

extra effort should not take place, from a welfare point

of view. Technological developments can shift the

optimal recycling level up, by lowering the costs of

recycling and/or increasing the quality of recycled

materials.

2. Circular rebound may do more environmental harm

Circular rebound effects explain why circular activities

can lead to higher resource use and more

environmental damage, if these activities increase the

level of production. There are two main routes:

First, if circular products do not act as a substitute for

primary products, but create a new market. Think of the

market for refurbished smartphones, which rarely

compete with primary smartphones. Instead, second-

hand phones are mainly sold to consumers with low

incomes that would otherwise not have bought a

smartphone (Stegeman, 2019; Zink & Geyer, 2017);

Second, if circular economy activities increase supply of

secondary materials that substitute for primary

materials. As supply increases, the prices of the primary

materials may fall. This may in turn drive demand for

both goods up (Zink & Geyer, 2017).

Prioritise homogenous, high volume & frequency goods

So, circularity is a way of lowering environmental

damage, but not always the best or only way. CE seems

best suited to quickly reducing impacts for sectors with

high volume and high frequency goods, that consist of

few and homogenous resources, such as (food)

packaging and textiles. Substantive long term gains will

be made via circular solutions for complex, lower

frequency goods such as electronics and construction.

energy and agricultural sectors, suggests that circular Lowering GHG emissions not always served best with circular strategies

strategies should not always be the first choice

(European Commission, 2016; Ellen Macarthur

Foundation, 2019 , IRP, 2019).

Shift to renewable energy

Electric Vehicles Replace current fleet by electric vehicles as soon as possible to phase out fossil fuel consumption

Why this conflicts with the circular economy

In the circular economy we want to maintain the value of the current fleet as long as possible to reduce the need to win iron ore

Solar panels Solar panels play a pivotal role in reducing GHG emissions.

Used solar panels are currently difficult to reuse and therefore value chains are mostly linear.

1.3 What is the current status of the circular economy? (1/2)

ING Economics Department 7 Rethinking the road to the circular economy – January 2020

We are becoming less circular

Towards 2050 the global population will increase by 2

billion (UN, 2019b), leading to even more environmental

pressure. This in turn increases the urgency of becoming

more circular. However, little progress has been made so

far. We see:

1. A world that is still far from circular;

2. Two demand trends working in the opposite

direction; and

3. Few regions with concrete circularity targets

1. The world is far from circular and it is getting worse

There is no single universally accepted and overarching

measure of circularity. However, some of the most

important indicators leave no doubt that the current

world is far from being circular:

• Research by Circle Economy (2019) shows us the

global economy is 9% circular. The percentage

indicates the share of recycled materials in all material

inputs into the global economy. For the EU this share is

somewhat higher, around 12% (Eurostat, 2019a);

1 The calculated calendar date on which humanity’s resource consumption exceeds the earth's capacity to regenerate those resources in a year. It fell on July 29 in 2019, compared to September 23 in 2000.

Based on Earth Overshoot Day1 (Global Footprint

Network, 2019), it takes 1.75 earths to support

humanity’s demands on ecosystems. One important

underlying cause is that around one third of global

annual food production is wasted or lost (European

Parliament, 2017);

• Increasing product lifetimes are an indicator of

circular economy growth. The number of garments

purchased each year by the average consumer

however increased by 60% between 2000 and 2014,

while clothing items are kept about half as long as in

2000 (McKinsey, 2016). Lifetimes of consumer

electronics also seem to be becoming shorter, which

has a negative effect on the circularity level (The

Guardian, 2015);

2. Two demand trends are going in the wrong direction

Two global demand trends are working against growth

of the circular economy:

a. Welfare gains will shift consumption towards less

sustainable products. Economic growth will raise

per capita welfare levels globally (PwC, 2017).

This will in general lead to:

• An increase in per capita consumption;

• A shift towards less sustainable consumption

patterns (e.g. higher meat consumption) (Our

world in data, 2019). Research by the EEA finds a

positive correlation between per capita welfare

and ecological footprints (European Environment

Agency, 2015). Recent ING research in addition

shows that countries with a higher GDP per capita

tend to reuse less (see figure below);

b. Growing demand for convenience, as illustrated by

the vast increase in demand for convenience food

and e-commerce (McKinsey, 2019). This increases

the use of packaging and associated packaging

waste (ING Economics Department, 2019).

Less inclined to reuse products when income rises Share of consumers with a positive attitude towards future reuse of products* versus 2018 GDP per capita

80%

60%

40%

20%

0%

$0K $20K $40K $60K

GDP per capita

* Share of consumers expecting to increase reuse of products in next 3 years by having them repaired if they break (instead of throwing them away)

Source: ING International Survey 2019

TR ES

RO IT FR AT

PL CZ

GB

BE DE

NL

Expansive growth fast fashion conflicts with the CE

Circular economy Trends in fashion (2000-2014)

Garment purchases +60%

Lifetime of clothing -50%

ING Economics Department 8 Rethinking the road to the circular economy – January 2020

1.3 What is the current status of the circular economy? (2/2)

Adoption of CE in policy-making still limited

Circular growth needs a helping hand

The two countertrends (p. 7) illustrate that actions are

needed to push the transition to a circular economy, in

so far that it contributes to reducing environmental

harm. Without taking measures, annual resource use is

forecast to double by 2050, while waste is expected to

grow by 70% (UN, 2017; World Bank, 2018).

CE acknowledged as means to reducing environmental

harm

policymakers worldwide see the potential role the CE

plays in tackling environmental issues. The UN for

example acknowledges the role CE can play to reach

some of the Sustainable Development Goals and the

climate goals in the Paris Agreement (UN, 2018; UN,

2019a). The Ellen MacArthur Foundation (2019) has also

argued the CE plays an important role in tackling

climate change. Multiple countries are exploring ways in

which they can apply circular practices to reduce

negative environmental impacts.

Adoption of CE in policy making is limited

Despite the growing interest, inclusion of the CE in

policy-making is still limited. The contribution of circular

strategies to policy goals needs to be better understood

and measured. The right measurement tools enable

policymakers to to define milestones, measurable

targets and identify the circular policies that are most

effective in tackling environmental issues.

CE requires changes in all value chain phases

Moving to a CE requires changes in the way products are

designed, produced and reused. Circularity targets in

Europe, however, focus on recycling and waste (the last

two product stages). The required changes in design and

production are not translated into measurement targets.

Europe and China are leading the way policy-wise

Europe and China are the only regions so far that have

adopted the circular economy in policy making. The EU

announced in the Green Deal to design a new Action Plan

for the Circular Economy in 2020 (EC, 2019b).

Quantitative circular targets focus on recycling and waste EU quantitative circularity targets

Source: European Commission 2019a

Some European countries have complementary circular

ambitions and targets. The Netherlands aims to be

100% circular in 2050. Given our previous discussion in

paragraph 1.2, it is neither realistic, nor optimal that this

can be achieved.

To sum up: we have discussed that moving to a CE is a

means to reducing environmental harm. Trends on the

demand side of the economy are however working in

the opposite direction, pushing down the economy’s

circularity rate. The next big question is: can the supply

side of the economy reverse this trend? We will discuss

the main hurdles for CE growth on the supply side of the

economy in Chapter 2.

Minimum share of municipal waste to be recycled by 2035 65%

Minimum share of packaging waste to be recycled by 2030 70%

Recycling targets for specific packaging materials:

• Paper and cardboard 85%

• Ferrous metals 80%

• Aluminium 60%

• Glass 75%

• Plastic 55%

• Wood 30%

Maximum share of municipal waste to be processed to landfill by 2035 10%

Share of plastics packaging that must be reusable or recyclable in a cost-effective manner

100%

ING Economics Department 9

Chapter 2 | What are the hurdles for circular economy growth?

2.1 What are the hurdles in the economy? 10

2.2 What are the hurdles in the financing market? 11

ING Economics Department 10 Rethinking the road to the circular economy – January 2020

often fall outside of the current market mechanism and

remain unpriced. From an environmental point of view it

is generally better to use secondary than primary

resources, in line with the circular economy (PBL, 2017).

However, as long as externalities are not fully taken into

account, the financial costs of using primary resources

will in many cases be less than the costs of secondary

resources. This puts the CE at a competitive

disadvantage to the current linear economy.

Hurdle 1: Inclusion of environmental

externalities makes CE more expensive

Hurdle 2: Transaction and operational

costs are higher in a CE

Hurdle 3: Volumes too low for circular

markets to emerge

2.1 What are the hurdles in the economy?

Hurdles: externalities, high transaction costs and low volumes

Markets are in favor of linear production

If moving to a circular economy were easy, we would

already be much more circular today. Looking at the

supply side of the market, the circular economy is more

complicated than the current ‘linear’ economy, in that:

• The CE takes both environmental and financial costs

into account;

• Circular strategies require more intensive value

chain co-operation; and

• Circular strategies require that secondary markets

emerge.

These supply barriers are holding back growth of the

circular economy. Until these hurdles are overcome, the

circular economy will not take off.

Hurdle 1. Negative externalities not priced

Extraction and use of resources cause environmental

costs (think of air pollution and biodiversity loss). These

costs are referred to as ‘externalities’, because they

Hurdle 2. Higher costs in a CE

High transaction and operational costs pose a second

barrier for the circular economy. Transaction costs

include the costs of tracking down second-hand goods,

finding suitable partners, organizing the reverse logistics

and negotiating the terms of the collaboration. The shift

to a CE also implies an expansion of reuse and recycling

activities, which are more labour-intensive. This will

drive up operational costs related to collecting, sorting

out and processing of disposed goods. The international

character of value chains makes it more difficult and

more costly to find and gather products for reuse. The

higher costs discourage new types of co-operation

within or between value chains. If these costs are too

high, circular markets will fail to emerge.

Three hurdles put the circular economy at a disadvantage

Linear

Hurdle 3. Volumes too low for circular markets

The circular economy requires markets for secondary

resources and second hand goods. Many of these

markets are nowadays absent due to insufficient

demand or supply. This prevents circular markets from

coming about. In some cases potential demand for

circular goods is in place, but a lack of knowledge,

willingness and/or value chain co-ordination hinder the

manifestation of circular supply. In other cases a lack of

consumer demand is the key issue. Previous research

indicates these are the main barriers to CE growth

(Kirchherr et al., 2017a).

Volume will be less of an issue for value chains that

depend on physically scarce resources and/or that are

prone to geo-political supply risks. Here, prices increases

of primary resources will stimulate the emergence of

circular supply chains and markets.

Circular

2.2 What are the hurdles in the financing market? (1/2)

ING Economics Department 11 Rethinking the road to the circular economy – January 2020

Visual 5 v/d redenen die

Paas lastiger maken

Hurdles: innovation risks and ‘blind spot’ for ‘linear’ risks

In addition to the supply hurdles in the market

economy, there are some hurdles that impede the

financing of circular business models1. As it turns out,

there are three hurdles to obtaining finance for CE

growth.

Hurdles in the economy hamper financing of the CE

The existence of externalities, high transaction costs

and low volumes are also a hurdle to CE financing.

Given that this puts the circular economy at a

competitive disadvantage compared to linear economy,

it is naturally less attractive to finance circular business

models. However, there are additional hurdles for CE

growth in the financing market.

PaaS model solution to some of the CE hurdles

Businesses with a PaaS business model1 sell the

functionality of a product, rather than the product itself.

The property rights thus remain with the supplier and

customers use the product through a lease, subscription

and/or pay-for-use arrangement. This has a positive

effect on the PaaS business case, as it helps to

overcome supply hurdles 2 and 3:

• Transaction costs of reuse strategies will be lower, as

product ownership is centralised with the PaaS

businesses. This reduces the costs of tracking down

products at the end of their lifetime (hurdle 2);

• PaaS businesses naturally take on the role of

coordinator. If coordination failure is the root cause

circular markets do not exist, PaaS models can help

to open up circular markets (hurdle 3).

However, the PaaS model has a specific hurdle that

needs to be addressed, as it has five ways in which

financial risks are higher than of traditional sales

models. We will discuss these risks on the next page.

1 Refer to Appendix II for a description of the five main circular business

models.

Reasons that make the circular economy riskier to finance

Hurdle 4: Innovative nature

Hurdle 5: ‘Linear risks’ are overlooked

Hurdle 6: Some CE business models are (Paas) perceived riskier Risk

Hurdle 4. Innovation risks hamper financing of the CE

The innovative nature of the circular economy makes

investing in CE riskier. The absence of track records

makes it harder to estimate future expected profits.

These innovation risks put the CE at a disadvantage

over conventional business models with proven track

records.

Hurdle 5. ‘Blind spot’ for ‘linear risks’ works against CE

Financial institutions may not fully take into account

the extra risks of linear compared to circular loans and

investments, also referred to as ‘linear risks’ (European

Bank for Reconstruction and Development, 2018). If this

is the case, this works against financing of the CE.

Examples of ‘linear’ risks are stranded asset risks and

risks related to more stringent environmental policies,

which will generally be lower for circular businesses.

However, financial institutions tend to be focused more

on the short-term (Van Tilburg et al., 2018), while these

risks matter for business performance in the longer run.

ING Economics Department 12 Rethinking the road to the circular economy – January 2020

2.2 What are the hurdles in the financing market? (2/2)

Diverging risks of PaaS model pose a challenge

Hurdle 6. Diverging financial risks of PaaS model

Of the five circular business models the financial risks of

PaaS models diverge most from linear business models.

The perceived higher riskiness poses a barrier for the

financing of this model, in addition to the limited

experience with the financing of PaaS models. There are

four areas where PaaS models have higher risks than

traditional sales models:

a. Usage risks are higher

PaaS providers are exposed to higher usage risks, the

risk that assets are used at a lower rate than expected,

and compared to traditional sales models. PaaS

businesses have longer pay back periods (ING, 2015), as

expected cash flows are spread over a longer time

period (where a sum of money is paid at once in

exchange for asset ownership). Often, the length of

contracts is shorter than the period needed to pay back

the asset investment. The increased emphasis on future

cash flows increases the level of uncertainty, as there is

no guarantee a new contract will be signed after the

current contract’s termination date. This negatively

affects the financial business case.

b. Risk that collateral value is limited

Liquidity risks of the PaaS model are higher and

collateral security lower than in a traditional sales

model (ING, 2015 ). The main assets of a PaaS business

are usually the assets leased to customers. These can

serve as collateral to lenders.

The collateral value is however limited as these assets

are not directly accessible. Collateral value is further

limited if assets:

i. Have relatively low value and/or are dispersed

(resulting in relatively high collection costs);

ii. Fulfill a primary or societal need. Social pressure will

in that case prevent financiers from seizing the

assets in case of a default;

iii. By law automatically belong to the owner of the

larger good (referred to as legal accession). This is

e.g. the case when lighting is integrated in the

ceiling of an office. It is in that case part of the

superstructure of the building and by law owned by

the landlord. Legal arrangements exist that can

solve this issue, but this needs to be organised.

c. Credit risks are higher

Credit risks (e.g. the chance of bankruptcy and non-

payment) are higher for PaaS businesses. By increasing

the affordability of products, they allow customers to

use a product by paying a small amount periodically

instead of paying the total purchase value at once. This

poses the risk that suppliers attract less creditworthy

consumers (adverse selection).

d. Moral hazard risks are higher

PaaS businesses face higher moral hazard risks than

traditional sales businesses. In the latter case, property

rights are transferred to the buyer when a sale occurs.

By doing so, producers shift product risks to the buyer

and avoid moral hazard risk: the tendency of consumers

to handle a product less carefully if they are not the

owner.

Altogether, we have discussed six hurdles on the supply

side of the market that prevent the CE from taking off.

Given these supply hurdles and the demand trends

working in the wrong direction (paragraph 1.3), we

conclude that CE growth will not be induced by the

market itself and that there is a need for policies. We

will discuss what policies are required in Chapter 3.

Five differences that make the Paas model riskier

a. Higher usage risks

b. Limited collateral value

c. Higher credit risks

d. Higher moral hazard risks Risk

ING Economics Department 13

Chapter 3 | How can we get the circular economy going?

3.1 What policy actions can set into motion CE growth in the economy? 14

3.2 What actions can stimulate financing of the CE? 16

3.3 Case studies: how to deal with the hurdles in practice? 18

3.1 What policy actions can set into motion CE growth in the economy? (1/1)

ING Economics Department 14 Rethinking the road to the circular economy – January 2020

Actions: environmental taxes and stimulation of CE innovations

Policies are needed to resolve the supply hurdles in the

market for CE growth (paragraph 2.1). This will improve

the competitiveness of circular businesses and unlock

new circular business opportunities, which will stimulate

market players to become more circular. Policies should

be aimed at:

1. Pricing in negative externalities;

2. Lowering transaction and operational costs;

3. Opening up markets for secondary goods.

Action 1: price in environmental externalities

Internalisation of environmental costs in market prices

helps to level the playing field between the linear and

circular economy. This provides an incentive for ‘green’

consumption and innovation by increasing the relative

price of polluting over that of ‘green’ products. Given

that circular production is generally more

environmental friendly than linear production, pricing of

externalities works in the circular economy’s favor.

Taxing most effective

Policy tools to deal with externalities include taxes,

subsidies, norms and bans. Some rules of thumb help to

see how to reduce pollution at the lowest possible cost.

In general it is more effective to (OECD, 2008; PBL,

2017):

• Tax polluting activities, so producers will seek a

lower-cost solution avoiding pollution. Bans or

standards only provide an incentive to reduce

pollution up to the point where producers are in

compliance and not beyond this point.

• Implement norms or bans where consumers are

insufficiently sensitive to prices. When implementing

a ban, make sure that banned products are not

replaced by more harmful products1;

• Tax polluting activities instead of subsidizing ‘green’

alternatives. A subsidy may increase total demand,

thereby limiting its positive impact;

• Charge polluters for the damage they cause, instead

of levying a tax on the end consumer;

Putting theory into practice is complex

Three aspects make pricing of externalities complex:

i. Translating environmental externalities into

market prices is difficult: available estimates are

highly uncertain (CE Delft, 2017);

ii. Balance between effectiveness and costs: often the

first-best option is very costly or difficult to

implement (PBL, 2017). Charging the polluter

directly for its damage can be more costly than

levying a tax earlier or later in the value chain.

Moreover, pollutants are in general less easy to

observe and measure, than production inputs or end

products. However, taxing pollutants is more

effective.

iii. Co-operation more effective, but complex:

Internationally co-ordinated environmental policies

are more effective, but also more time consuming

and complex to implement. The fact that many

value chains are international makes local pricing

policies less effective, as externalities related to

domestic consumption cause damage abroad.

Policies can create an equal level playing field between the linear and circular economy

Policy actions

Price in

environmental costs

Another drawback of tackling the issue at a local

level is that businesses may move abroad to

countries with more lenient environmental laws.

Linear Circular Linear Circular

3.1 What policy actions can set into motion CE growth in the economy? (1/1)

ING Economics Department 15 Rethinking the road to the circular economy – January 2020

1 This happened with the ban of Chlorofluorocarbons (CFCs) to protect the ozone layer. This triggered the development and use of hydrochlorofluorocarbons (HCFCs), which turned out to be potent greenhouse gases

ING Economics Department 16 Rethinking the road to the circular economy – January 2020

3.1 What policy actions can set into motion CE growth in the economy? (1/2)

Actions: knowledge dissemination and ‘nudging’

Action 2. Spur innovations that lower costs of the CE

By stimulating innovations that lower the transaction

and operational costs of the circular economy,

policymakers can facilitate CE growth. For example:

• Platform technology helps to lower information

costs by matching supply and demand for residual

waste streams and secondary products;

• Modular product design can help to improve the

reusability of products and/or lower the operational

costs of reuse;

• New business models help to improve the

infrastructure for circular strategies. An example is

Madaster, a library and generator for material

passports, which helps to lower the costs of tracing

the provenance of materials in real estate.

Policy actions bring linear and circular more in balance

Mission driven innovation

Mariana Mazzucato stresses the structural role of

governments in fostering innovation (Mazzucato, 2018;

EC, 2018). She argues that policymakers can stimulate

innovations that lower the costs of the CE by defining

concrete and engaging circular missions. These missions

need to be supported with measurable targets.

Furthermore, financial and non-financial instruments are

needed to foster bottom-up innovation: think of

conditional subsidies and loans, Public-Private-

Partnerships and CE procurement standards (Van Tilburg

et al., 2018).

Stimulate cross-value chain collaboration

Collaboration between suppliers within and between

value chains is key in a circular economy. Appendix 2

discusses the increased interactions in circular value

chains by discussing the five main circular business

models. Policymakers should therefore encourage value

chain players to collaborate with each other, by defining

missions from a problem-focused instead of a sectoral

lens: it is for example better to aim for 100% carbon

neutral cities, than a 100% fleet by 2030. Meeting the

first requires collaboration between multiple sectors,

while the second solely focuses on the automotive

sector.

Action 3. Knowledge dissemination and ‘nudging’

Dissemination of CE knowledge among consumers and

producers and ‘nudging’ can increase the effectiveness

of environmental taxes and innovation policies

(Centraal planbureau, 2018b). Kirchherr et al. (2017a)

find that lacking consumer interest and awareness and

a hesitant company culture hold back growth of the

circular economy. The CE concept has not become

mainstream yet and is still mainly the domain of

sustainability professionals.

A campaign on the need to throw glass in recycling

containers in the Netherlands is a successful example of

knowledge dissemination. It has enabled the recycling

of glass by changing consumer behaviour (Centraal

planbureau, 2018a). Nudges are interventions that steer

people in particular directions but fully preserve

Transaction and

operational costs

Volumes

Linear Circular Policy actions

Spur innovation

• Platform technology

• Modular product design

• New business models

Knowledge dissemination

and ‘nudging’

Linear Circular freedom of choice. Take for example the placement of

coloured foot steps in the direction of stairs, to

encourage people to take the stairs. Both knowledge

dissemination and ‘nudging’ can help to realise the

scaling up in demand needed to open up circular

markets, and can trigger businesses to explore available

circular business opportunities.

ING Economics Department 17 Rethinking the road to the circular economy – January 2020

3.2 What actions can stimulate financing of the CE? (1/2)

Inclusion of ‘linear risks’ levels the playing field

Even with the discussed policy actions on the previous

page, circular businesses are still disadvantaged in the

financing market, due to the three hurdles in this market:

• Innovation risks of CE businesses are higher than of

proven business models;

• Financiers tend to overlook the exposure of

conventional businesses to ‘linear’ risks;

• Deviating risk profile of PaaS business model.

policymakers can stimulate financing of the CE in

different ways (actions 4 and 5). Financiers can further

develop financing solutions for PaaS models to reap the

benefits of this business model.

Action 4. More risk capital for CE start-ups

Governments can increase the amount of risk capital for

CE start-ups to stimulate financing of the CE. Research

by Oliver Wyman (2017) indicates that limited availability

of risk capital is a barrier for CE growth in the

Netherlands. policymakers can influence the amount of

CE risk capital in two ways (Van Tilburg et al., 2018).

• Indirectly, by providing guarantees for private loans or

investments in the CE; or

• Directly, by providing loans to the CE, or investing in

CE start-ups. Reviewing the conditions attached to

existing public innovation funds can help, if these are

focused on technological (‘hard’) innovations. CE

innovations tend to be ‘softer’ (e.g. business model or

organisational innovations).

Action 5. stimulate further integration of

environmental and linear aspects in risk models

Research shows that ‘linear’ risks and environmental

aspects are not fully incorporated in decision-making by

financial institutions (Centre for Sustainable Finance,

2016; EBRD, 2018; DNB, 2019). Existing instruments to

measure these risks need further improvement in order

to take them into account. This will increase the interest

of financial institutions in financing CE ventures:

• Portfolio adjustments: a major shift from ‘linear’ to

circular financing will help to reduce environmental

harm. This will in turn a mitigate the adverse effects

of environmental harm on financial business

performance;

• Individual investment decisions: circular businesses

are less exposed than conventional businesses to

e.g. reputational risks and the trend towards more

stringent environmental laws.

Encourage data investments for ‘linear risk’ modelling

The researchers from CCSF show that a lack of data

discourages financiers to develop tools that include

environmental aspects in risk models. Policymakers can

stimulate market players to invest in the availability and

quality of the required data, by e.g. expanding

disclosure requirements on environmental aspects. An

example is the recently implemented sustainability

disclosure requirements by the European Commission

(2019).

Shift focus to long term performance

Another way in which policymakers can stimulate

integration of ‘linear risks’ is with governance

adjustments that shift the focus of financial institutions

to the longer-term. Research shows us that the

tendency of the financial market to focus on the short-

term is partly driven by the practices and regulations

that govern them (Caldecott & McDaniels, 2014).

Take for example the adjustment of the solvability rules

for insurers (Solvency II) that enable investments with

longer-term horizons (Van Tilburg et al., 2018). Sending

credible signals on future tightening of environmental

regulations is an other way to stimulate a longer-term

focus, by making lenders take into account the higher

legal risks of linear businesses. This will improve the

competitiveness of environmentally friendly over

conventional businesses and will thus work in favour of

the CE.

More risk capital for CE start-ups helps to level

the playing field

CE startup

Linear Circular

ING Economics Department 18 Rethinking the road to the circular economy – January 2020

3.2 What actions can stimulate financing of the CE? (2/2)

Financiers need to develop tailored solutions for PaaS model

Financiers need to develop new financial solutions

Of the five circular business models, it is the PaaS model

that has diverging financial risks compared to

traditional sales models. It requires that financiers

develop new financial solutions that help to deal with

the extra risks discussed in paragraph 2.2. The limited

experience with the usage risks of PaaS businesses

poses an important barrier for the financing of these

businesses. It is up to the financial sector to explore

ways of managing these risks.

Exploring ways to deal with usage risks

Financiers are currently looking into ways to deal with

the extra usage risks of PaaS models. Possible solutions

for financing PaaS businesses are different for business-

to-business (B2B), versus business-to-consumers (B2C)

oriented businesses:

• B2B: usage risks can be managed with legal

contracts that provide security on future expected

cash flows. These contracts enable the use of

project-based financing models, where finance is

provided to a project, instead of a company. The

financing business case is then based on future

expected cash flows, rather than on past track

records. The security about future cash flows that

can be obtained from contracts is higher for longer-

term contracts. Given the long-term nature of many

of these contracts, project based financing provides

a solution for B2B PaaS models;

• B2C: these PaaS businesses often rely on short-term

contracts, limiting the security they provide on

future cash flows. An alternative scenario to fall back

on is therefore needed in the case expected PaaS

revenue falls short. Guarantees may provide a

solution here, e.g. if the asset manufacturer agrees

to buy back assets that cannot be marketed by a

PaaS provider.

A thorough assessment of the creditworthiness of the

customers underlying the contracts is a prerequisite for

contract-based financing.

Identifying the most viable cases

Financiers need a method to pre-assess the business

opportunity of different PaaS propositions based on

relevant characteristics and past experience. This will

help to allocate means more effectively, as the

financing of PaaS businesses requires a tailored

approach and is therefore more labor-intensive and

costly (e.g. it takes time to set up the legal contracts

needed for project financing). Relevant characteristics

are e.g. collateral value, costs of relocation of assets

and estimated market size.

Embedding the circular economy

Embedding knowledge of the circular economy in

financial sector is essential to trigger financing of the

circular economy. Employee training and

empowerment are needed to enable them to identify,

assess and finance circular businesses.

Financial sector as catalyst for circular growth

Beyond these actions, the financial sector can act as a

catalyst for CE growth by helping to establish the

collaboration needed for a flourishing circular economy.

Due to its extensive network within and between value

chains, the financial sector can facilitate the shift

towards circular value chains.

Businesses and financial sector need to tackle hurdles

We discussed the role of policies in levelling the playing

field between the circular and linear economy1. But the

CE can only get off the ground if businesses and the

financial sector also take up the challenge of becoming

more circular. By joining forces we can tackle the

hurdles for circular growth (Chapter 2). The case studies

discussed on p. 18 and 19 show us how businesses have

already come up with innovative ways to deal with the

CE hurdles. Business ingenuity is crucial for accelerating

growth of the circular economy.

ING Economics Department 19 Rethinking the road to the circular economy – January 2020

3.2 What actions can stimulate financing of the CE? (2/2)

1 The actions discussed cover five important policy areas, but are not exhaustive.

ING Economics Department 20 Rethinking the road to the circular economy – January 2020

3.3 Case studies: how to deal with the hurdles in practice (1/2)?

Business ingenuity can unlock circular business opportunity

Although policies are needed to lower the CE hurdles and accelerate CE growth, there are ways in which businesses can

deal with them in the meantime. The case studies in this section illustrate how the circular economy is making progress,

with business ingenuity and creativity. Technological inventiveness is the starting point for most of the business cases.

One key is companies finding ‘win-win’ solutions, such as finding a way of making consumers’ lives easier or offering

them additional protection against risks. This way, customers have a personal benefit in purchasing circular solutions.

Scaling up to achieve efficiencies and finding ways to finance the related risks are other keys to success.

Success: commercial & circular interest are aligned

Swapfiets offers cycling as a service in many European cities. The bicycle fleet has grown rapidly towards 175,000 users. Swapfiets offers its clients ‘a bike that always works’. With this service, customers are free of the burdens of owning a bike such as repairing flat tires, regular maintenance and being insured against theft (with a deductible excess). The main purpose of the PaaS model is to offer cycling as a service, not to increase circularity. However, commercial and circular interests are aligned. In order to offer ‘a bike that always works’, Swapfiets uses more expensive parts to ensure the high quality and lifespan of the bike. E.g. more durable alloy rims and lighting that works on magnetism instead of batteries.

Hurdle: moral hazard risk poses a challenge

Bikes are expected to last six years. The first Swapfiets bikes have been on the road for two years now. So currently the reverse logistics flow of bikes is limited and confined to repairs during the lifespan of the bike. A plan for what to do with used bikes after six years will be developed when they have reached the end of their economic lifespan. Besides charity purposes, it is unknown yet if the business case to give the bikes a second life is commercially viable (hurdle 2). Furthermore, the company wants to reduce ‘application fraud’ as some customers stop paying soon after receiving the bike (hurdle 6d).

Success: incentives & efficiency wins to close the loop

The fairphone is a smartphone fully designed by circular principles. The phone is modular by design, so that batteries, screens, cameras and so on can easily be replaced or upgraded. It offers customers the option of having the phone repaired (and even doing this themselves), rather than having to replace it. Fairphone intentionally introduces new models infrequently so that customers use their modules and phone longer. Fairphone closes the loop with financial incentives to return old smartphones (both fairphones and other brands), and optimising recycling streams per module.

Hurdle: circular phone much more expensive

The fairphone is designed to be used for five years, twice as long as the average smartphone. However, performance and design are middle of the road at the time of purchase. That could restrict repairability in 3-5 years as the model might be viewed technologically outdated by users (even when updates are taken into account). The circular premium of around €200 is likely to be too high to make it a product for the mass market, so demand is likely to be limited (hurdle 3). The price difference is caused by the fact that costs for modular design and production are higher (hurdle 2) and the fact that negative externalities of cellphones produced in the linear economy are not priced in (hurdle 1).

Success: modular design, 3D printing and recycled inputs

Signify, formerly known as Philips Lighting, produces high quality, energy efficient and circular lighting solutions. Production has become more sustainable through eliminating waste and the use of 100% renewable energy by 2020. Products are circular due to circular design thinking, new 3D printing techniques for which the materials can be reused and increased use of recycled plastics. The lights’ material footprint has been reduced by 47% as a result. Signify sees that clients increasingly demand circular services, such as serviceable lights and replaceable components.

Hurdle: low demand for circular lighting

Demand for fully circular lighting is still low (hurdle 3). A systemic change towards a circular economy requires many changes in multiple dimensions like product design, reversed logistics, collaboration, business models, cultures, etc. They also need to converge at the same time. Launching customers such as governments can accelerate demand for fully circular service models (Light as a Service) via government initiatives like the EU package for circular economy, Green Public Procurement and Green Deals.

ING Economics Department 21 Rethinking the road to the circular economy – January 2020

3.3 Case studies: how to deal with the hurdles in practice (2/2)?

Business ingenuity can unlock circular business opportunity

Success: circularity increased with operational improvements & innovations

Drentea is a manufacturer of office furniture (chairs, tables and cabinets) with a strong focus on circularity. In the past years circularity was improved by reducing waste, using better resources such as recycled monoplastics and the quantification of the ecological footprints of products. Currently circularity is improved through circular contracts, including PaaS. Drentea also puts a lot of R&D effort into bioplastics that could be substituted for plastics from fossil fuels.

Hurdle: circular procurement is more costly & time consuming

The product life of office furniture has been extended by circular design and production. However, electronics have increasingly become a feature of office furniture. Think of electronically adjustable tables and digital lockers. As a result, software updates and replacement of electronic parts need to be an integral part of the circular proposition.

Circular procurement is gaining popularity but is still complex in practice. • Customers need to have realistic ambitions. In businesses with low profit margins

like office furniture it is costly to trace the origin of every single material in the product as is often demanded in tenders (hurdle 2).

• Furthermore, customers have diverse goals. Some focus on CO2 reduction, others on resource efficiency or both and the focus can change during the procurement process.

• For businesses, circular procurement can be improved by a more holistic view on circularity (not only the office furniture, but also carpets and lighting, not only in the headquarters but in every building of the company, etc). In practice, businesses may start with fully circular tenders that lose their impact as they become fragmented (hurdle 2).

Nowadays, fashion plays a role in the office furniture market. Tables that facilitate both sitting and standing have gained popularity quickly. As a result, prices for second hand tables that only facilitate sitting have collapsed. Low prices limit the possibilities to cover collection, refurbishment and distribution costs in order to give them a second life (hurdles 3 and 6c).

Success: growing demand & focused on innovation

Avantium develops innovative chemistry technologies across industry value chains in order to produce chemicals and materials based on renewable feedstock instead of fossil resources. It is best known for the development and production of bioplastic PEF that can replace fossil fuel- based PET plastic that is used in plastic bottles for water and carbonated soft drinks. Avantium is not a standard circular company; it however produces ‘bio-based’ resources that are essential for circular supply chains and circular companies. Avantium has developed several technologies for bioplastics and is now increasing production capacity by building production facilities. Global demand for bioplastics is high and global production is currently at maximum capacity.

Hurdle: scale needed to lower operational costs

In the past, improving plastic supply chains was all about substituting fossil fuel-based plastics with bio-based plastics and improving the quality of the bioplastics. Nowadays, this needs to be complemented by end-of-life policies to fight the plastic soup problem, both in water and on land, as a bio-based plastic soup is also harmful to the environment.

Global production capacity must be increased so that economies of scale can make bioplastics cost competitive (hurdle 2). The well known 0.5 litre bottle provides a case in point. Mass production of a plastic PET bottle costs around 6 eurocents per bottle. With current low production volumes a bioplastic bottle costs almost three times as much. This will go down when produced at mass scale. The pricing of negative externalities of PET and glass bottles or aluminum cans also improves the business case of biobased bottles (hurdle 1).

Financing green chemistry is difficult as it requires a long-term horizon, is capital intensive and is a high risk business (hurdles 4 and 5). Avantium has successfully passed through the 'valley of death' where many new ventures fail to attract sufficient finance or become a listed company. Becoming a profitable business in the coming years will further improve the company’s ability to attract finance.

Finally, better information is needed for consumers as many cannot see the wood for the trees in the complex world of sustainability, circularity and plastics. Many believe that bioplastic means that it is biodegradable, while the term instead focusses on the resources from which the plastic is produced. While PEF degrades much faster than fossil-based plastics, it will take years. This incorrect view prevents consumers from disposing of them correctly, with many entering the environment instead of being recycled.

ING Economics Department 22 Rethinking the road to the circular economy – January 2020

Sources (1) Also of interest

• Accenture (2014), Circular Advantage

• De Boer & Van Ittersum (2018), Circularity in agricultural production

• Caldecott & McDaniels (2014), Financial Dynamics of the Environment: Risks, Impacts, and Barriers to Resilience

• CE Delft (2017), Environmental Prices Handbook 2017

• Centraal planbureau (2017), De circulaire economie van kunststof: van grondstoffen tot afval

• Centraal planbureau (2018a), Circulaire economie: economie en ecologie in balans

• Centraal planbureau (2018b), Verkenning brede welvaart 2018

• Centre for Sustainable Finance (2016), Environmental risk analysis by financial institutions

• Circle Economy (2019), PaaS question kit

• Circle Economy (2019), The Circular Phone

• DNB (2019), Values at risk? Sustainability risks and goals in the Dutch financial sector

• Ellen Macarthur Foundation (2019), Completing the picture: how the circular economy tackles climate change

• European Bank for Reconstruction and Development (2018), Linear Risk. Business impacts of linear consumption practices

• European Central Bank (2019), Climate change and financial stability

• European Commssion (2016), Science for environment policy

• European Commission (2017), Critical raw materials

• European Commission (2018), Mission-Oriented Research & Innovation in the European Union

• European Commission (2019a), Implementation of the Circular Economy Action Plan

• European Commission (2019b), The European Green Deal

• European Environment Agency (2015), Correlation of ecological footprint (2008) and the human development index (2012)

• European Parliament (2017), Food waste: the problem in the EU in numbers

• European Union (2019), Fairphone created the world's first ethical, modular smartphone

• Eurostat (2019a), Circular material use rate

• Eurostat (2019b), Private investments, jobs and gross value added related to circular economy sectors

• Global Footprint Network (2019), Earth overshoot day

• The Guardian (2015), Lifespan of consumer electronics is getting shorter, study finds

• The Guardian (2019), Fairphone 3 review: the most ethical and repairable phone you can buy

• Henckens et al. (2016), Mineral resources: Geological scarcity, market price trends, and future generations

• ING International Survey (2019), Circular economy: Consumers seek help

• ING Economics Department (2015), Rethinking finance in a circular economy

• ING Economics Department (2019), Plastic packaging in the food sector

Circular construction

Most opportunities for demolishers and wholesalers

Rethinking finance in a circular economy

Financial implications of circular business models

ING Economics Department 23 Rethinking the road to the circular economy – January 2020

Sources (2)

• IRP (2017), International trade in resources

• Kirchherr et al. (2017a), Breaking the barriers to the circular economy

• Kirchherr et al. (2017b), Conceptualizing the circular economy: An analysis of 114 definitions

• Mariana Mazzucato (2018), The entrepreneurial state

• McKinsey (2016), Style that’s sustainable: a new fast-fashion fomula

• McKinsey (2019), Perspectives on retail and consumer goods

• Our world in data (2019), Meat and dairy production

• OECD (2008), An OECD Framework for Effective and Efficient Environmental Policies

• OECD (2010), Taxation, Innovation and the Environment

• Circle Economy (2019), The circularity gap report

• PBL (2017), Fiscale vergroening: belastingverschuiving van arbeid naar grondstoffen, materialen en afval

• PwC (2017), The long view: how will the global economic order change by 2050?

• Romijn (2018), Beprijs de milieuschade

• Stegeman (2019), De vrije markt zal de circulaire economie niet realiseren

• Van Tilburg et al. (2018), Financiële beleidsinterventies voor een circulaire economie

• UN (2017), With resource use expected to double by 2050, better natural resource use essential for a pollution-free planet

• UN (2018), Program of the Joint Meeting of ECOSOC and the Second Committee

• UN (2019a), Circular economy crucial for Paris climate goals

• UN (2019b), World population prospects

• UN International Resource Panel (2017), Global Material Flows Database

• UN International Resource Panel (2019), Global resources outlook 2019

• Waite et al. (2018), Without changing diets, agriculture alone could produce enough emissions to surpass 1.5°C of global

warming

• Wastelab (2019), Onderweg naar zero waste met Royal FloraHolland

• Working Group Finance (2016), Money makes the world go round

• World Bank (2018), Global waste to grow by 70 percent by 2050 unless urgent action is taken: World Bank report • Wyman (2017), Supporting the circular economy transition

• Zink & Geyer (2017), Circular Economy Rebound

ING Economics Department 24 Rethinking the road to the circular economy – January 2020

Appendix I: what is the circular economy about?

CE aims for growth, without natural capital loss

What is the circular economy?

Lots of interpretations of the circular economy (CE)

exist. It is therefore good to make explicit what we

mean by it. Consensus tells us that we should look at

both its purpose and its principles1.

Purpose: economic growth, without natural capital loss

The purpose of a circular economy is to create welfare

by realising growth within the earth’s regenerative

capacity. In other words: economic activities must not

result in permanent natural capital loss.

Circular economy mainly focuses on ‘planet’ and ‘profit’

People

Human capital

Circular

economy

Viewed from the commonly used “triple bottom line”

(people, planet, profit framework) the circular economy

thus mainly focuses on creating environmental (planet)

and financial value (profit).

Three basic principles

A circular economy is based on three principles, being

that it aims to:

• Reduce resource use: by increasing resource

efficiency2, consuming less, sharing goods and

substitution of scarce resources;

• Retain value: the value of goods and materials in

use should be kept as high as possible, for as long as

possible;

Planet

Natural

capital

Profit

Financial

capital

• Minimise waste: useful resources or energy of

disposed products or by-products should be

recovered to reduce waste and resource extraction.

Not just about closing the loops

With the definition in mind we can tackle a common

misunderstanding about the CE: unlike of what the name

suggest, the CE is not always about ‘making circles’.

Of the four material types used for production (biomass,

fossil fuels, metals and non-metallic minerals), only the

material cycles of metals and non-metallic minerals can

be closed. Biomass and fossil fuels on the other hand are

by definition not ‘circular’, in the sense that they can only

be consumed once: once you eat an apple or use a gallon

of gasoline the value drops to zero.

That does not mean that activities related to biomass and

fossil fuels do not fit in the concept of a circular economy.

However, circularity for these materials is about:

1. Ensuring that the level of consumption does not

exceed the earth’s regenerative capacity (biomass);

2. Substitution with renewables (fossil fuels);

3. Higher resource efficiency and less waste.

42% material use by definition not ‘circular’ Share of global material extraction in 2017

Biomass

- By definition ‘circular’

Fossil fuels

Metal ores

Non-metallic - Potentially ‘circular’

minerals

Source: UN International Resource Panel 2017

48%

10% 16%

26%

ING Economics Department 25 Rethinking the road to the circular economy – January 2020

Appendix I: what is the circular economy about?

1 T

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f

o

r

m

l

y

a

c

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e

p

t

e

d

d

e

f

i

n

i

t

i

o

n

o

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h

e

c

i

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c

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lar economy (Kirchherr et al., 2017b)

2 Resource efficiency: resource use per product

ING Economics Department 26 Rethinking the road to the circular economy – January 2020

Appendix II: what are the main circular business models?

Five underlying circular business models

Five main circular business models

Circular business models are mentioned a couple of

times to discuss the hurdles for CE growth (Chapter 2).

Here we describe the main circular business models. We

adopt the five business models defined by Accenture

(2014)1, which are commonly used as the main business

models underpinning the CE.

Why do we need new business models in the CE?

The shifted focus from transactions and cost efficiency

as main profit drivers in the linear economy, to higher

resource efficiency, less resource use and value

retention in the CE explains why businesses need to

earn profits in a different way.

1. Circular supplies

Business models based on supplying fully renewable,

recyclable or bio-based resources as alternative to

single-lifetime inputs.

2. Resource recovery

Business models that recover useful resources or energy

out of disposed products or by-products and thus

transform waste into value.

3. Product life extension

Business models that extend working lifecycles of goods

and materials by reselling, repairing, refurbishing,

remanufacturing and repurposing of products.

4. Sharing platforms

Business models that promote a platform for

collaboration among product users (individuals and/or

organisations). The platforms enable increased

utilisation rates by facilitating shared use, access or

ownership of products.

5. Product as a service (PaaS)

Business models that offer product access, instead of

ownership, to customers. Businesses retain ownership

of products, while products are used by one or many

customers through a lease or pay-per-use

arrangement.

Circular business models translate the CE concept into business opportunities

1. Circular supplies

2. Resource recovery: recycle

Product design Procurement Manufacturing Logistics Sales and marketing Product use End of life disposal Reverse logistics

2. Resource recovery: waste as a resource

Other production proces

2. Resource recovery 4. Share

3. Product life extension: repair / upgrade

3. Product life extension: remanufacture

3. Product life extension: resell

ING Economics Department 27 Rethinking the road to the circular economy – January 2020

Appendix II: what are the main circular business models?

5. PaaS models can be applied by businesses at any level in the supply chain

Source: Accenture, 2014; Kirchherr et al., 2017b) 1 Based on an analysis of more than 120 case studies of companies that are generating resource productivity improvements in innovative ways.

ING Economics Department 28 Rethinking the road to the circular economy – January 2020

Would you like to know more?

Author

Mirjam Bani

Economist

ING Economics Department

+31 (6)150 49 126

Mirjam. Bani@ing.com

Marieke Blom

Chief Economist Netherlands

ING Economics Department

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Editors

Marten van Garderen ING Economics Department

Gerben Hieminga ING Economics Department

Lex Hoekstra ING Economics Department

Joanna Konings ING Economics Department

And special thanks to

Tom van Aken Avantium

Bert Top Drentea

Thomas Leenders Signify

Edzard Kalff Swapfiets

Joost van Dun ING Sustainable Finance

Nishant Parekh ING Sustainability

Marc Borghans ING Sustainable Finance

Rianne Hordijk ING Economics Department